Roth-style investing in TSP continues to grow

May 15, 2013

Federal employees are increasingly taking to Roth-style investing in their retirement savings program, although Thrift Savings Plan accounts remain heavily weighted toward traditional investments, according to the TSP.

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The TSP says that in the year since Roth investing became available, both the number of participants using that option and the amount on investment have grown every month, to 188,000 accounts and $355 million through April.

“We are pleased that our participants have evaluated their options and taken advantage of this opportunity,” TSP Executive Director Greg Long said in an e-mailed statement. “The Roth TSP option is an important tool for TSP participants. They can manage their retirement income by providing greater choice in the tax treatment of contributions now and in the future.”

The TSP, a 401(k)-style plan for federal employees and uniformed personnel, started accepting Roth-style investments last May. However, many participants could not make such investments until months later because their payroll providers weren’t ready. By year-end 2012, 101,000 participants had $130 million in Roth investments.

In Roth-type investing, money is invested on an after-tax basis and is tax-free on withdrawal, as are its associated earnings so long as certain conditions are met. Traditional investments are made with pre-tax money that is taxable along with its earnings on withdrawal. Participants can make new investments into one or the other type of balance or both, but existing funds in one cannot be converted to the other.

Agency contributions for employees under the Federal Employees Retirement System are made in the traditional form regardless of whether how individual invests.

There are about 4.6 million TSP accounts, including federal employees and uniformed personnel and those who separated for retirement or other reasons but left their accounts in place. Through April, they had a combined $352 billion on investment, meaning that Roth balances accounted for less than 1 percent.

The TSP says that about 40 to 50 percent of similar employer-sponsored retirement savings plans offer Roth-style investing and that in those plans, about 6-10 percent of participants make that type of investment. The TSP’s Roth participation rate is 4 percent after the first year, a time in which it has added Roth information and online calculators to its site, www.tsp.gov.

The TSP said in the statement: “The TSP will continue to provide participants and agencies with educational materials to help them understand their TSP options but, as with all tax matters, participants should seek the advice of their qualified tax or financial advisers for answers to questions pertaining to their specific tax situation. Contributing to Roth TSP may not be an appropriate choice for everyone’s financial situation.”

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